Accounting Theory paper

Please read the article attached, and answer the following questions. YOU SHOULD REFER THE ARTICLE TO ANSWER THE QUESTIONS.

1. Discuss the FASB’s standard setting process.  You should summarize what the article discussed for the process, and then should provide your opinions.

2. What is XBRL?  Please discuss for the SEC’s position on the adoption of XBRL. 3. Please discuss the roles of DCF in SEC

14 JU

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Updates from FASB and the SEC

Leslie F.
Seidman

▼

Paul A.
Beswick

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Standards Setting, Outreach, and Convergence Projects

eslie F. Seidman presided as FASB chair
from December 2010 to June 2013 and
served two terms as a FASB board
member since July 2003. Prior to her
appointment as chair, Seidman first
served as a FASB industry fellow, later
as a project manager, and then as assis-

tant director of research and technical activities. Before
joining FASB, she set accounting policies for J. P.
Morgan & Co. (now JPMorgan Chase) and worked
as a member of Ernst & Young’s audit staff.

Paul A. Beswick is the SEC’s chief accountant.
The Office of the Chief Accountant (OCA) is respon-

sible for establishing accounting and auditing policy
at the SEC. Beswick oversees the SEC’s work with
private-sector accounting organizations, such as
FASB; he also serves as an observer to FASB’s
Emerging Issues Task Force (EITF). Prior to
joining the SEC, Beswick was a partner at
Ernst & Young.

On May 2, 2013, Seidman and Beswick presented
the opening remarks at Baruch College’s 12th Annual
Financial Reporting Conference, discussing recent
developments at FASB and the SEC, respectively. The
following is an edited transcript of their remarks deliv-
ered at the conference.

L

LESLIE F. SEIDMAN
FASB Chair

This spring, FASB is celebrating its 40th
anniversary, and we are here to stay. FASB
was created in response to calls for
greater independence and accountability in
the development of accounting standards.
We’ve had six chairmen over those 40
years, and although each of us has clearly
introduced new ideas about processes and
priorities, two things have remained con-
stant: 1) our commitment to developing
standards that benefit investors by provid-
ing a clear window into the financial con-
dition and performance of the companies
in which they are invested or they seek to
invest in, and 2) our commitment to a
transparent, collaborative process that
involves all of our stakeholders and pro-
duces standards that meet users’ informa-
tional needs at a reasonable cost. My 10-
year term ends on June 30, and my suc-
cessor and fellow board member Russell

Golden will become the seventh chair-
man of FASB.

I’d like to start by giving you an update
on how FASB is working to promote con-
vergence of global accounting standards. I
then want to highlight some developments
on the due process front here at home,
including how we’re considering costs and
benefits, and then I want to mention plans
related to FASB’s future technical agenda.

Working with the IASB
The past four decades have seen remark-

able development in the improvement
and convergence of financial reporting
internationally, driven by the demands of
our increasingly global capital markets.
Since signing the Norwalk Agreement in
2002, FASB and the IASB have complet-
ed work on a number of major joint
projects, including our impending standard
on revenue recognition. Our work togeth-
er has both improved financial reporting
and brought global reporting standards
much closer together, delivering significant
benefits to investors and other users of
financial statements around the world.

Our methods of working together have
evolved over those years. Most recently,
as you know, FASB and the IASB have
been working intensely as partners on the
revenue recognition, leasing, financial
instruments, and insurance projects. The
completion of these remaining four joint
projects over the course of the next year
or so will end our formal bilateral rela-
tionship with the IASB. It will not, how-
ever, end our participation in the develop-
ment of improved and converged global
standards.

The establishment of the ASAF
[Accounting Standards Advisory Forum]
ushers in a new, multilateral approach to
pursuing the objective of global conver-
gence. FASB, along with representatives
of 12 other national or regional accounting
standards setters, will meet periodically to
advise the IASB as it develops IFRS.
FASB’s participation on the ASAF is an
important opportunity to represent U.S. per-
spectives in the IASB’s standards-setting
process and to learn from the experiences
of other jurisdictions. We plan to support
the process by providing research and
analysis, staff support, and timely comments
on the IASB’s discussions. One of the key
projects that this group will discuss with the
IASB is the conceptual framework project,
including measurement, derecognition, and
other comprehensive income. The IASB is
planning to issue a discussion paper some-
time this summer, and FASB will help solic-
it input from U.S. stakeholders.

FASB will retain control over its own
technical agenda. Whether we’re consid-
ering the conceptual framework or any
other project, any proposed changes to U.S.
GAAP will go through FASB’s delibera-
tive and public due process procedures. On
topics of mutual interest, our goal will be
to contribute to and leverage the work of
the IASB in order to maximize the changes
for a converged outcome.

At least for now, FASB will continue to
decide what changes are made to U.S. GAAP
following our normal due process procedures.
In the absence of any decision from the SEC,
I want to emphasize that FASB remains com-
mitted to our longstanding and long-term
objective of improving U.S. GAAP and
promoting greater convergence in financial
accounting standards. Ideally, the world’s
standards setters can work together, so that
eventually the differences in standards across
nations will become so insignificant that the
standards have, in effect, become a single set
of accounting standards.

JULY 2013 / THE CPA JOURNAL 15

15FASB/SEC

▼

FASB remains committed to our
longstanding and long-term

objective of improving U.S. GAAP.

16 JULY 2013 / THE CPA JOURNAL

FASB’s Standards-Setting Process
Accounting standards are essential to

the efficient functioning of the econo-
my because decisions of how resources
are allocated depend upon credible, con-
cise, and understandable financial infor-
mation. A body of academic research
demonstrates the link between the deci-
sion-usefulness of financial information
and the cost and availability of capital—
that is, higher quality financial report-
ing reduces investor uncertainty,
which has a beneficial effect on the cost
of capital, bid-ask spreads, market liq-
uidity, and so forth. For that reason, our
starting point in developing an account-
ing standard is understanding and
evaluating the investor’s perspective.
How can we make financial reports
more decision-useful for them?

Doing a better job at gathering infor-
mation from investors—the benefit side
of the equation—is one of the most sig-
nificant improvements to the process
that we’ve made in recent years. But
financial information comes at a cost—
the cost of preparing and using that
information. So when FASB says it
won’t issue a standard unless the ben-
efits justify the cost, it means that we
aim to issue standards only if the
expected improvements in the quality
of reporting will justify the cost of
preparing and using the information.
Until investors have experienced using
that information, our understanding of
the benefits is based upon what they tell
us they need, and how they plan to
use it. Likewise, until a company has
adopted a new standard, our under-
standing of the cost is based upon
their imprecise estimates, even in a well-
constructed and broad-based field test.

The process that I’ve just described
to identify the most faithful way to
produce the information includes an
implicit statement: we do not try to con-
trol how others will interpret or act on
the information. We also do not attempt
to quantify a specific economic effect
on a particular company or a particular
industry. For example, if we were to
issue a standard that changes a mea-

sure of leverage, the cost of capital for
entities with higher leverage could rise,
whereas the cost of capital for other enti-
ties with less leverage could decline. We
don’t try to influence the outcome of
that reallocation or repricing of capital.

Our goal is to provide neutral infor-
mation; however, it is observable that
when market participants perceive
an improvement in the credibility of
the information they’re receiving,
the efficiency of the market improves,
and investors are better able to price
stocks and other capital investments.

Expanded Outreach Efforts
The entire FASB standards-setting

process is a means of gathering infor-
mation and carefully analyzing the
expected benefits and costs of pro-
posed changes. We regularly review
and modify our procedures to enhance
the quality of that analysis. For exam-
ple, we’ve expanded and will con-
tinue to expand our outreach efforts
to financial statement users, particu-
larly in the early, preagenda evalua-
tion of whether to add a project to
make sure that we’ve properly iden-
tified the problem or the potential
improvement in reporting. We’ve also
been using our XBRL [Extensible
Business Reporting Language] team
to conduct research on our projects
and to identify current reporting pro-
cesses, as well as part of our post-
implementation review process.

We’ve also expanded our out-
reach to the preparer community by
hosting industry workshops and other
forums at which preparers provide
focused input on the cost and work-
ability of our proposals. Our exten-
sive work on the revenue recogni-
tion proposal, which also included
investors, is an example of this proac-
tive approach. In addition, we’re
developing a transition resource group
on the revenue recognition project and
on any other major changes in
accounting in order to provide a trans-
parent way for questions about imple-
mentation to surface and be resolved.

In recent years, the Financial
Accounting Foundation [FAF] has also
implemented a postimplementation
review process that takes an indepen-
dent look at the effectiveness of the
standards after they’ve been in effect
for several years. These postimple-
mentation reviews provide us with use-
ful information about the benefits and
costs of financial reporting in light of
actual experience in both preparing the
information and in using it.

Our staff is now analyzing how we
might address these findings. The
evaluation of whether a proposed
accounting change produces more
useful information to investors at a
reasonable cost is necessarily subjec-
tive; however, we are committed to
using methods that proactively and
broadly engage users, preparers, audi-
tors, and regulators so that board
members can make informed deci-
sions, and in responding to that
feedback, board members can identi-
fy areas for further improvement
and change. The process should work
as a continuous feedback loop, so that
we are improving reporting on a time-
ly and efficient basis.

FASB’s Upcoming Agenda
The last topic that I’d like to men-

tion is FASB’s futiure agenda. Several
of our major projects will conclude
over the next year or so. We asked our
Financial Accounting Standards
Advisory Council (FASAC) to gather
information from stakeholders about
potential agenda items for FASB in the
near future. We’re going to be asking
about the importance and relative pri-
ority of projects that we have put on
the backburner in order to make
room for higher priorities, such as
distinguishing between liabilities and
equity and improving financial state-
ment presentation; items that have been
in the news recently, including
accounting for pensions and account-
ing for income taxes; convergence
items; and any other topics that stake-
holders would like to raise.

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JULY 2013 / THE CPA JOURNAL 17

PAUL A. BESWICK
SEC Chief Accountant

With my time today, I’d like to cover a
few broad topics. First, I’d like to give
everyone an overview of the OCA, spend
some time talking about consultations
that we’ve been dealing with, give you an
insight into what my priorities are, and talk
about IFRS. I also want to discuss account-
ing standards and the global financial
reporting environment.

Overview of OCA and Its
Current Priorities

The past six months at the commission
have seen a lot of change. The former chief
accountant has left; we now have a new
chairman—Mary Jo White—and she’s
very quickly prioritizing her issues and get-
ting stuff done. But in the past six to nine
months in the OCA, we’ve really been
sticking to our core competencies, like con-
sultations, overseeing the standards setters
(FASB and the IASB), and overseeing
the PCAOB. The office is set up such
that there is a chief accountant who is, by
title, listed as the principal advisor on all
accounting, auditing, and independence
matters. There are three groups within the

OCA: an accounting group; a profession-
al practice group, which is responsible for
overseeing the audit and independence
functions; and an international group. The
importance of the international group is that
the SEC plays a very active and involved
role in the International Organization of
Securities Commissions (IOSCO). We also
have a chief legal counsel.

Another aspect is rulemaking. Although
we don’t take the lead on many rulemak-
ings, we are very active in a number of
them. It always seems that no matter
what the SEC picks up, there’s some inter-
action with either accounting and auditing
independence. So we work very closely
with our other offices and divisions.

In terms of our priorities, we’re spend-
ing a lot of time working on the conver-
gence projects. FASB and its staff are pro-
ducing several exposure drafts right now,
and we’re spending a lot of time reviewing
them and providing our comments. We have
a group of about 12 people who work on
overseeing the PCAOB; they also have a
very active agenda in terms of standards set-
ting. We’re also focusing on IFRS outreach.

Consultations
We spend a lot of time helping regis-

trants get the accounting right from the
beginning. There are two ways consulta-
tions come in. One is on a prefiling basis,
where a registrant is about to enter into a
transaction or has entered into a transac-
tion and has questions, or just wants to
get confirmation on whether it got the
accounting right. There’s a process that
companies can follow; the procedures are
on the SEC website—basically, they
write in and they discuss with the staff
whether they got the accounting right.
Consultations also come in on a postfil-
ing basis. It’s better to come in on a pre-
filing basis than a postfiling basis, but we

do get postfiling consultations, through
the Division of Corporation Finance, the
Division of Enforcement, or from the
PCAOB as it performs the inspections of
accounting firms. Sometimes, PCAOB
staff will run across accounting that they
might not think complies with GAAP, and
one of the things they do is consult with
us. We also get consultations on a post-
filing basis from registrants. About 45%
of our consultations come in from regis-
trants; about 40% come in from within
the SEC; and the last 15% or so come
from other places, like banking regulators,
the PCAOB, and the AICPA.

In terms of the nature of the consultations,
they haven’t been changing much year over
year, but if you look at the top four, you
have revenue recognition (which is primar-
ily principal-agent consideration and multi-
ple-element arrangements). You’ve got
financial instruments, troubled debt
restructurings, allowance for loan losses.
You’ve got business combinations and push-
down accounting—which I’m thankful is
on the EITF agenda and hopeful that it can
provide some guidance to decrease the num-
ber of questions we receive on push-down
accounting. And then you have consolida-
tion and variable-interest entities.

This is our thought process regarding
consultations: we try to make a determi-
nation about whether a company’s view
is reasonable in light of existing account-
ing guidance. We do have a very rigorous
process, and we have certain triggers that
require consultations up the scale—all the
way up to the chief accountant. But ulti-
mately, what we’re trying to do is make a
determination about whether we object to
a company’s accounting.

Getting a little more granular in terms of
the process: when a consultation comes in,
we assign a team to it, usually three to four
people who have expertise in the area. We
then focus on understanding the transac-
tion and obtaining the relevant facts. We try
to understand the basis for the company’s
accounting position. We identify the
appropriate literature, determine whether
we’ve answered the question before, eval-
uate the company’s basis and whether
there’s a reasonable application of the

FASB/SEC 17

Are we improving the decision-
usefulness of information to
investors? Can the standards

be implemented?

▼

18 JULY 2013 / THE CPA JOURNAL

accounting literature, discuss the dif-
ficult judgments with the registrant,
and ultimately conclude whether we
object. That’s generally the process we
try to follow.

We honestly don’t try to substi-
tute our judgment for the judgment of
the company and its auditors. We’re
really trying to determine whether the
accounting is outside the bounds of
what is acceptable. Unfortunately, in
those situations where we do object,
people have tended to say that we
substituted our own judgment, but
that’s not really the goal. We don’t
try to push preferred views; if there
are multiple views that are acceptable
under the literature, we really try to
support that. We use this whole pro-
cess of consultations as input into
FASB’s standards setting; as input for
our own efforts; and, in some cases,
as input for the enforcement division.

Standards Setting and
Convergence

I often get asked what our role is in
relation to FASB’s standards setting.
The approach that I take, and I know
some of my predecessors have taken
this approach, is that we really don’t
try to substitute our judgment for
what FASB is doing or what the IASB
might be doing. We look at our role
in terms of answering some key ques-
tions: Are we improving the decision-
usefulness of information to investors?
Can the standards be implemented?
Are the objectives sufficiently clear?
We look to FASB as the experts and
accounting standards setter; its staff has
done a lot of work and a lot of out-
reach. We really try to just focus on
making sure that the standard is
improving financial reporting. I think
FASB should get a lot of credit because
they’ve really increased both the qual-
ity and the quantity of outreach to
investors over the past couple of years.

I would be remiss if I didn’t talk
about IFRS. We frequently get asked
what the next steps are. As I said,
we’ve got a new chair and she’s work-

ing through her priorities. I wouldn’t
read into anything, in terms of whether
IFRS isn’t or is a priority. I think
there are just some things that need to
get addressed first—money market
fund reform, cross-border filing, those
sorts of things.

In 2010, the commission issued a
statement in support of convergence in
global accounting standards and
directed the staff to develop and exe-
cute on a work plan. The staff finished
that work plan on July 13, 2012. As we
looked around the global market, we
learned that almost every jurisdiction
has some sort of mechanism to ensure
suitability, and I don’t think that should
be lost on anybody. At times people
came in and said, are you trying to get
rid of FASB? In my view, FASB is
integral to any decision that the com-
mission makes. And one of the things
we heard from people is that FASB
does a wonderful job and that we need
to keep it heavily involved. That’s not
to say that there wouldn’t be benefits
from taking the next step, and the ques-
tion is: what is the next step, and how
big a step are we going to take? That’s
something that the staff is continuing to
study; we’re continuing to do outreach
to preparers and auditors to continue
to explore these issues.

Why does this matter? Why does
moving to a single set of global
accounting standards matter? When
I look back to my experience at the
commission, as compared to when I
started there four-and-a-half years
ago, things are getting more global.
It’s not just accounting. The com-
mission is working on over-the-
counter derivatives, and they’re work-
ing hard to try to resolve the issue
on a global basis. That’s not to say
that we’re going to give up our
sovereignty and regulate over-the-
counter derivatives, and rely on some-
body else to do that regulation. But
one of the things that the financial cri-
sis taught us is that there is intercon-
nectivity, probably a lot more than we
might have realized.

The other reason why IFRS mat-
ters and why a single set of stan-
dards matters is that IFRS is already
in the U.S. capital markets. IFRS in
the U.S. capital markets is probably
a lot bigger than people realize. Since
the commission lifted the reconcilia-
tion for foreign private issuers,
we’re now up to more than 450 for-
eign private issuers who are using
IFRS without reconciliation. The mar-
ket cap is in the trillions of dollars for
those foreign private issuers, which is
bigger than a lot of jurisdictions that
claim to be on IFRS. There are U.S.
investors who are trading and mak-
ing investment decisions using IFRS-
based standards. From my perspec-
tive, it’s important that we stay
involved. I think Leslie’s given you
some wonderful examples of what
FASB’s doing through its participa-
tion in the ASAF. We were very sup-
portive, and we think their participa-
tion can improve that product. Once
again, I don’t think their participation
lessens their role in the U.S. capital
markets. I think FASB’s role in the
U.S. capital markets will always be
important.

There are other things we’re doing
as well. The chair of the SEC is on the
monitoring board, which provides the
governance oversight to the IASB. The
IASB is including the United States in
many more working groups. For
example, it has a working group that’s
trying to do what they call “effect anal-
ysis.” They’re trying to determine how
they should think about costs and ben-
efits, and I’ll be participating in that,
along with some representatives from
FASB. Things are becoming more
interconnected, and that’s why this
matters. People are making investment
decisions based upon IFRS, so it’s
important that we focus on IFRS and
try to make it the best-quality product
that we can.

Questions from the Audience
Audience Member: At each con-

ference, the SEC representative says

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JULY 2013 / THE CPA JOURNAL 19

that they’re studyin g the is s ues .
Conceptually, this works, but you’ve got
to take a stand.

Beswick: One of the things that we’ve
learned is that, right now, there is a lot of
change fatigue in the system. FASB is set-
ting standards on some of the most funda-
mental projects that exist in financial report-
ing. A typical refrain we hear from pre-
parers is that all they can handle right now
is what FASB’s already putting out. So to
layer on top of that another series of
changes could be somewhat problematic.

What I’m trying to do is think about
the ways that we can have a softer transi-
tion over time. In some ways, that will frus-
trate preparers because they’ll feel like
they’re facing perpetual change, and
that’s one of the challenges we face. But
I think there is real risk to the system if
you use a “big bang” approach.

We’re also seeing that in other jurisdic-
tions, like Japan and India, which are
having the same realizations in terms of
change management. That’s one of the rea-
sons why we’re studying it. We are light-
years ahead of where we were five years
ago, in terms of the level of information
that we have on this. It might have
slowed down the process, but it’s going
to make any decision that’s made a better
decision. We’re a lot better informed today,
and by using that information, we can
make better decisions.

Audience Member: My question relates
to the revenue recognition, as it relates to
IFRS adoption. One of the larger debat-
ing points when we were talking about
IFRS adoption was the importance of the
regulation system around revenue recog-
nition in terms of SEC enforcement. But
now that we’re evidently going to have a
joint project on revenue recognition, and
we’re going to have some experience in
the application of that guidance, do you see
that particular impediment lessening as an
objection to IFRS?

Beswick: I don’t want to say we’re exper-
imenting with the capital markets—but this
is going to be an interesting test from a reg-
ulatory perspective. It’s good that FASB and
the IASB can get to a converged standard,
and I think they deserve a lot of credit for

getting to that. We then have to look not only
to FASB and the IASB, but to the securi-
ties regulators and the accounting firms to
make sure that application and enforcement
is relatively consistent. You’re never going
to have perfect consistency; you don’t even
have that in U.S. GAAP. But the range of
consistency, at least what we’ve seen in U.S.
GAAP, is fairly narrow, and I think people
are interested in making sure that remains
the case on a global basis.

One of the things we’re doing is increas-
ing our interactions with our counterparts
across the globe. There’s an organization
called ESMA—the European Securities
Market Authority. They oversee securities
regulators throughout the European Union.
We’re increasing our interactions with
them. We’re having greater dialogue with
people in Asia. Really, it’s to share views
and highlight places where the divergence
might become too great. To the extent that
we see that, we then need to go inform the
standards setters. We’re already seeing that,
in standards that have converged. Things
are getting sent to the International
Financial Reporting Interpretations
Committee [IFRIC], for instance, on issues
where there was convergence and we iden-
tified some different practices.

To your point, that’s a really good test
case to make sure that these standards can
stay converged. That’s one of the things that
preparers and investors want to see. I think
FASB coming up with this resource
implementation group is a wonderful step;
it demonstrates great leadership by FASB
and the United States on a global basis.

Seidman: I was going to mention the plan
to develop this implementation group, and
our view is that the IASB should be partic-
ipating with us on it. One of the sugges-
tions is that we might include somebody
from IOSCO, an international securities reg-
ulatory group, which will provide a natural
mechanism for diversity in interpretation to
surface early in the process, so that we can
resolve those matters before widespread
application. We’re taking the steps we
think are necessary to have a transparent,
thorough discussion of the standard.

As you know, we’ve allowed for a
significant amount of lead time to adopt

the revenue recognition standard, but we
really want to make this transition as
smooth as possible for everybody on not
only the preparer side—because we know
for some industries it’s going to be a cost-
ly effort to systematize this—but also,
importantly, on the investor side. We want
to try to avoid having a hiccup in the
transition to revenue recognition if at
all possible.

Audience Member: In your personal
opinions, did the rule that allowed foreign-
based corporations to issue financial
statements here without reconciliation to
GAAP further your core mission of
financial statements being more readily
understandable by the investment public?

Beswick: In 2008, when the commission
took action, it was to remove the recon-
ciliation. Companies always could have
used IFRS, so I don’t know if the infor-
mation loss was in the reconciliation. On
a global basis, it sent a good message about
not having carve-outs and trying to pro-
mote high-quality financial reporting.
We’ve learned a lot through that process.
We issue comment letters on FDIs [foreign
direct investments] that are filing under
IFRS. The marketplace is learning from
our experiences, in terms of our under-
standing of IFRS.

When I look back to four-and-a-half
years ago, our understanding of IFRS has
increased significantly. What would be
interesting would be to do some sort of
postimplementation review or to go back
and look at investors and how they’ve
reacted to the loss of incremental infor-
mation that is the reconciliation. That’s
something we haven’t done, but that might
be an interesting exercise.

Seidman: The exercise would probably
give you a different result today than it would
back then, because we’ve continued to nar-
row the differences between U.S. GAAP and
IFRS. I do think it has furthered our core
mission, with regard to our commitment to
converge these standards. The fact that there
are more than 400 foreign private issuers fil-
ing in the U.S. capital markets with a dif-
ferent set of accounting standards provides
the impetus for us to continue to narrow
the differences. q

FASB/SEC 19

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permission.

Reproduced with permission of the copyright owner. Further reproduction prohibited without
permission.